Brooks Automation's CEO Presents at the UBS 2012 Global Life Sciences Conference (Transcript)

| About: Brooks Automation, (BRKS)
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Brooks Automation, Inc. (NASDAQ:BRKS) UBS 2012 Global Life Sciences Conference September 20, 2012 3:00 PM ET


Steve Schwartz, President & Chief Executive Officer

Martin Headley, Executive Vice-President & Chief Financial Officer


Good afternoon, and welcome to UBS Global Life Sciences Conference. My name is (inaudible). I am happy to be your host for this session. Our next presenters will be Steve Schwartz, President and CEO and Martin Headley, Executive Vice-President and Chief Financial Officer from Brooks Automation. There will be a breakout session in the Broadway room immediately following. Thank you.

Steve Schwartz

Thank you, Manit [ph]. Good afternoon everyone. First I would like to thank UBS for inviting us to the conference. This is our first time to be actually at a Life Sciences conference and I’ll explain the nature of that commentary and the history of the company and give you some idea as to why we are here and why we are really enthusiastic about our prospects in Life Sciences.

So what I would like to do, I’d like to introduce Brooks Life Science Systems business. It’s a $60 million business unit. It’s part of $500 million Company whose heritage is in the Semiconductor Automation space. So we are a $60 million Life Sciences business and we would to think of ourselves supported by a $500 company that brings technology, global presence, global reach and a cash position to help us to grow in this area that we find to be very exciting. Convergence if you will, are the core technologies of the company that we are going to apply to Life Sciences. In addition to the semiconductor franchise that we have, we have a roadmap for how do we continue to advance these core technologies to grow a very valuable space in Life Sciences, and that’s how we’ll spend our time and comments today.

First of all we are company that’s about growth both growths in the core space that we have in the business in and around the semiconductor automation industry and in the developing Life Sciences business where we believe we are the forefront of a very exciting area that relates to the automated Cryogenic storage of biological samples.

I want to give a little bit of history of the company from financial standpoint. I show here a look at a company five quarters ago. So we are looking at the March 2011 quarter, the semiconductor and the adjacent space that relates to the core businesses we have in and around semiconductor and electronics devices. We are $122 million in the quarter as the services that support those businesses in a very large installed base, about $22 million for the quarter. We also had a contract manufacturing business that made us an assembler if you will of some complex automation capabilities for large OEMs and the run rate of that business was approximately $200 million per year as a contract manufacturing business. The issues that we had in and around the contract manufacturing business it was in 11% gross margin business. So although very strong from a revenue standpoint and we were growing the business, it was tough to grow it as profitably as we were able to participate in the other parts of this space. We had no presence in life science but we did have a cash position $178 million of cash and no debt.

In the quarter ended June, just five quarters on the semiconductor business going through normal course of cycles was $108 million, the services business was approximately flat $22 million in the June quarter. But in June of 2011 we divested the contract manufacturing business, the proceeds of $80 million we invested back into Life Sciences. We are out of the contract manufacturing business, we are in the Life Sciences business and I’ll spend some time talking about that very specifically. But now we are in a business that generates 40% gross margin, we are able to grow the cash position of the company that will help us to fuel our future growth, we are $200 million of cash and no debt and we also instituted a quarterly dividend in the September quarter of 2011, $0.08 per share at current stock price that’s about a 4% dividend yield.

So a little bit about the semi – in what we call the core semi in the adjacent market place. It’s for automation and Cryogenic for places where we participate as a company, the movements of material in a controlled environment in a factory is around Robotics and between the Robotics and the Robotics’ systems, we have a business that is approximately $200 million of $500 million. And in and around Cryogenic, Cryogenics pumps to create a high vacuum for the manufacturer are very critical process steps in semiconductor. The Cryogenics’ business has given us about $150 million of revenue. We have about 30% market share with a significant amount of headroom here as we continue to make investments in around this $1.5 billion of available market.

The drivers for us that are different from the current cyclic nature of the semiconductor business relate not just to the semiconductor content but also to the form factors. So the mobility of devices is really changing the market opportunity that exists for us. When you look at an I-Pad for example, the active touch screen requires three thin layers of coding and those vacuum coding applications are performed by our PolyCold CryoChillers that are part of -- instrumental in those systems. These MEMS devices for accelerometers. For example, the things that keep the image upright when you rotate are MEMS devices and we serve those markets in addition to semiconductor as well. There’s been a strong opportunity led by LED and the organic LED and these are areas that we call adjacent spaces. We are investing heavily in the market that it relates to adjacent spaces that we have a core capabilities and technologies that allow us to expand beyond the normal growth in the semiconductor. And there’s one further dimension that is coming related to the changes in Wafer size, the way productivity gains are made in semiconductor is an addition to shrinking the line width in the technologies, the size of the Wafer, the number of guided manufacturer can made on specific Wafer continues to increase almost to one time for a ten year period. The industry is moving from 12 inch or 300 millimeter diameter Wafers now, in the next five years it will move to 450 millimeter diameter Wafers and there is a very distinct discontinuity that happens where all two of our architectures will be modified and changed again for us to replenish and rejuvenate our position in each of the markets where we participate when the industry moves to 450 millimeters.

We show here the Brooks’ product systems design winds, we are very aggressive going after the current space as it relates to semiconductor and adjacent space, we track approximately 20 designs in winds per quarter. These are incredibly valuable design winds because when we get designed into a process step into a process tool, it takes about 1 to 2 years before we get volume production, but once we are secured in a process tool, the design winds linger on for another 5 to 7 years over the life of the product. So the investments that we make today will bear fruit as we continue to gain market position, we are investing heavily both in the adjacent and semi front end space the superordinate objectives for the company. Then in addition to the 30% market share we have today in those core businesses that will continue to gain at least 200 basis points per year of market share in what we still see as a valuable growing market. And when you look at the opportunity that exists, the core $1.5 billion of available market that came to us in 2011, we’ll grow somewhere in the range of 7% to 12% and as we gain market share there, by the time we get to 2014, we’ll have an even more significant position than the $500 million in core businesses today.

But what we wanted to talk about today very specifically is a new opportunity for the company. There’s a space that’s related to the automated cold storage of biological samples. Today it’s about $150 million market, it’s growing at more than 20% per year in growth rate and today we have about 40% market share position by means of acquisition and I’ll detail specifically how we got there and also what the next steps are as we continue to participate in what we see as a really exciting opportunity for us.

When we looked at opportunity that exists in Life Sciences we saw technical challenge whereas the convergence of Cryogenic technology, the ultra-cold storage of samples and automation came together. Today, there are more than a billion samples stored on earth mostly when its stored below -80 degrees C or stored in a mechanical freezer or in a liquid nitrogen cooled stainless steel tank, the value of the samples however is too great to be handled from manual standpoint. Sometimes the samples are stored 10,20, 30 years and the thermo cycling that goes on when people manually extract that, the needed sample and put the others back into the freezer is damaging and so that the value of the samples that at a period of time down the road is really unknown and uncertain. There’s a small market as I mentioned $150 million market growing very rapidly for the automated management of these samples in a cold environment. And the thing that’s most interesting for us is that it’s converging really towards the very strong engineering capabilities we have at Brooks in that more automation is required, colder temperatures are necessary, that temperatures below -80 degrees and engineering different from the science, the engineering is really the critical aspect here. The ability to apply engineering principles for the preservation, storage and management of cold samples as we already a very distinct opportunity.

The capabilities we have relate to semiconductor around automation is that we move Silicon Wafers and Glass Plates with sub millimeter accuracy. In Cryogenics just to give you some idea, Cryogenic pump operates at about -260 degree C. So we have all the wherewithal and technology that is necessary to manage samples down at -150. We track tens of thousands of Wafer samples a day in any given factory and the clamminess of a semiconductor factory somewhere of the order of 10,000 times cleaner than a hospital operating room. So we are very fast in micro contamination, contamination control. When we apply the same technologies in and around life science and instead of moving samples, we move DNA, RNA tissue and other biological samples. The Cryogen expertise requires us to go down below -150 degree C which we see as relatively straight forward. We do track millions of samples instead of tens of thousands, but we do have that capability inside the company and then the furnace requirements, we have Aseptic processing requirement and cleanliness of the order of the operating clean room. So the core technology capabilities of the company align particularly well.

We started our path into Life Sciences by acquiring two of eight automated sample handling companies. In 2011, April we acquired our RTS Life Sciences, a company based in Manchester U.K. and in July 2011 we acquire Nexus Biosystems and the headquarters there is in Poway, California, near San Diego and they had an entity in Oberdiessbach, Switzerland. In the acquisition of these companies we got about 250 employees who were vast in the art and in the market. We got 100 new customers and it’s all base of 180 cold stores operating our customers that you will know when I have a change to show them in a moment. We obtained the market leading position, we estimate we have about 45% of the installed base market share but we are gaining market position now greater than 50% share for all incremental cold stores and most importantly we have expertise that leads us into the next generation of technology which really relates to automated stores but colder and smaller because it will help to expand the customer base between the 100 to 200 customers who can afford a $2 million cold store into thousands of customers who will be able to afford a smaller colder store that will be sold for hundreds of thousands of dollars as part of a laboratory research or biological environment.

I show here a graph that shows the installed base from the acquisition of Nexus and RTS Life Sciences. The blue bars are primarily stores that were automated systems at -20 degrees C. mostly for chemical compound stores for large pharmaceutical companies. In the mid-90s there began to be some demand for colder stores as it related to the storage of biological samples. We see very significant growth in the biological aspects, the compound stores for our pharmaceutical continues to be steady on an annual basis. The explosion of growth comes from biological samples. We strongly believe that colder storage systems that are smaller is what will make the market take off even more from here after we continue to penetrate the -80 degrees cold stores.

So all of the top 20 pharmaceutical companies are customers for our cold stores. I think I recognize about every one of the ones on this list. When we get into the biological aspects and we talked about -80 degrees stores, we begin to add biological companies. We have C-Cone on here , we have Forensic Labs. So the number of application, the number of capabilities for the storage of biological samples will continue to grow and the customer list will grow exponentially as well beyond the large pharmaceutical companies. So we see a very significant opportunity here and our ability to come to the market with smaller colder storage we think will continue to grow the customer base significantly.

To give you an idea about the revenue structure, we are running the business now about $50 million run rate for the cold storage business as I mentioned growing more than 20% per year. The system’s revenue if you will is approximately half the revenue the devices related to formatting of the sample both on the input and the output side of the cold store. Right now about 13%, consumables constitute 15% and because of the high value of the sample and need to make sure that they are managed properly and automation systems continue to function properly, the services business as it relates to the Life Sciences opportunity. Right now it’s running around 22% of revenue. So we like the revenue mix, we like the growth rate of the opportunity and to share with you the subordinate objective we have as a company, today the Life Sciences business is about 8% of revenue for the company. So one year on we’re about 8%. Our objective two years from now is that the Life Sciences business for the company will be in excess of 20% of the revenue for the company, at the same time that we grow the core business of the company. So we’re aggressively investing in the semiconductor and adjacent side of the business and even more aggressively investing of ourselves in the Life Sciences business because we want to take advantage of a very significant growth opportunity based on core capabilities for the company.

So one year on, we’ve been in the business now since the end of July for all practical purposes, end of July 2011, very significant growth in the opportunity to store biological samples solutions of the preferred method.

So once a customer goes for manual freezers and manual liquid nitrogen doors into automated systems, they don’t go back and add more non-automated capability. Once they move to automated capability that’s the direction that they’ve gone. We’re finding that government agencies who fund the various studies, medical studies, are now beginning to put pressure on the people who want to perform the studies that the samples be stored in a safe environment so they can be retrieved efficiently, accurately and to have a safe and guaranteed high quality sample at the end of the process.

We’re very confident about the market position. We’re winning now more than 50% of the cold store business. We’re very aggressive going after all of the opportunities that come up and the presence in sampled storage management system we think opens up opportunities for us to continue to expand along the cold chain with the vision that ultimately high quality samples of known history and origin will arrive at point of user point of need, not just to be high quality but with a temperature profile that extends through the life of the storage of the sample as well as the data that’s necessary to accompany that sample so that it can be a viable sample used in a precise study. And we think the opportunity that exists ultimately to be able to grow the Life Sciences available market to something that’s of the order of $2 billion.

So we look at the available market for Brooks. We look at the semiconductor and adjacent portion for $1.5 billion to more than $2 billion and over the next two years period we believe that the opportunity grows from $150 million up to something of the order of $700 million on the current product pipeline end market opportunity that we’ve identified for the Life Sciences space in and around sample management in the cold chain.

And with that, I’ll turn the presentation over to Martin Headley, CFO.

Martin Headley

Thank you, Steve. What we seek to depict here in this chart is what the underlying business has performed at and this is a little different from what is shown in our financial statements because our financial statements continue to include historically the contract manufacturing business that Steve referred to that we divested for the end of June last year. So if we axe that out you see the cyclical basis or the cyclical trend that we have in the semi frontend product. We saw an extreme cycle down in 2009, which was actually to juncture. We did a very significant financial restructuring of the business that’s changed our performance thereafter and you’ll see that beyond that we have a services business, the green bars which is just the services business associated with our semiconductor and adjacent market business. This has got a fairly steady growth characteristic and we’ve been building that business quite nicely.

The industrial business that you see referred to here is around our Cryogenics `business, primarily around applications for a variety of industrial coatings and industrial coatings go from the coatings you put on tablets and Smartphones all the way to coatings that may be put on your reading glasses. Our devices facilitate the effective deposition of those coatings.

The adjacent markets, very excited about those in the long term. You saw from the design and win charts that we’re making significant advances in the market we’re winning for the future, but you’ll see that our revenues from this area have declined in the recent three or four quarters as a result of over capacity that was put in largely in the LED area in response to Chinese government incentives in 2011.and the orange bars show the commencement of our growth in the Life Sciences business.

Given that cyclicality that you see, one of the core underpinnings of our management style is to be nimble and responsive to the market conditions that we see and to be able to adjust our cost structures accordingly and therefore we measure ourselves by how our adjusted EBITDA preps with the revenues there and really the only time you see a lack of particularly close tracking was in the period from the third quarter to the fourth quarter of fiscal 2011 when we brought in more of a G&A infrastructure associated with the acquisitions in the Life Sciences area.

With the completion of some of the restructuring projects that we announced and disclosed at the beginning of this week, we’ll be taking a good part of some of those additional costs out of the business as a result of implementations of our centralized IT initiatives and from downsizing the Swiss location in the Life Sciences business.

Otherwise we’ve had a 34% average EBITDA drop through from revenues up and down. We would see that that should be moving forward to over 40% now that we don’t have the contract manufacturing business as you see would depress that growth through – during the early parts of this chart.

Clearly one of the areas we’re consistently working on is our gross margin and our gross margin dynamic if you look in our core semi and adjacent market business, fiscal 2011 was running at about 37%. You’re seeing that we’ve got the Life Sciences business up to about 40%. Had a little bit of an issue with mix recently and in the last quarter the business has cycled down slightly. We’re at a 33% gross margin. Our target is to get to 40%. Well, how do we get from there? Well, we’ve done a lot of work and spent a fair degree of resource, including money with consultants on supply chain consolidation and second sourcing initiatives that are ready to roll once we have the approval with our customers for our supply chain changes to go through in the semiconductor environment. There’s a lot of approval processes associated with what are called copy exact process.

We’ve also as I previously talked about looked at the full print rationalization in Life Science systems with no longer manufacturing in Switzerland and having pulled that back into California and into the UK. We’ve got some end of life product captions that have been challenging for us. Some of our products had some old semiconductor components involved in the control boards. Those have got to an end of life situation with results in increased cost and increased inventory. We’ve got new designs ready to initiate in getting out to the market now that will improve margins and we have a much higher growth margin structure in our Life Sciences business. We think we’re going to see this in the mid 40% range very quickly.

On the negative side, we’ve got a mix in semi frontend that’s favored some of our lower margin products recently. We’ve also had some supplier quality inefficiency impacts and as some of you may have heard, in the semiconductor industry there’s a lot of consolidation going on and as part of that consolidation we’ve been working with newly consolidated companies on long term pricing roadmaps.

The net impact of all these various moving parts is a positive gross margin structure for us going forward, but there are many things in motion. And also reflective of a lot of things in motion and the transformation of the company is the fact that our GAAP net income which you see there went from $60 million in 2010 to $130 million in 2011 and our trailing 12 months where at September fiscal end, so the trailing 12 months for the ending June 30 2012 was $33 million. But within are embedded a lot of one time issues or one time benefits. We had a gain on the sale of the contract manufacturing business of about $43 million. In 2010 we had a gain from selling some IP on a piece of business that we’d exited and we’ve had a variety of restructuring expenses and tax benefits.

Net, net the adjusted EPS that we’ve talked about, that we’ve disclosed and printed over the last three years was $0.79 in 2010, growing to $1.35 last year and pulled down to $0.59 in the current year without the contribution of the contract manufacturing. Some dilution from the Life Sciences business during the initial quarters that we’ve owned the businesses we’ve gone through integration and from a downturn in the semi cycle as we talked about on the show during the revenue chart.

Current market trend, there’s a pullback in semiconductor and it’s very difficult for us to cold bottom on that. One of the areas we’re extremely excited about is backend wafer handling. This is the final stages in semiconductor device manufacturing which traditionally have been done on the diced wafers at the individual component levels which because you have to fin the wafers to make, to stack the wafers for these very slim devices that we now use with all these computing power and tablets and Smartphones need to be handled at a wafer level and that’s a new and growing market that’s available to us.

We have a stronger outlook for our core business in capital in CY2013 from the key spenders, the key buyers, ultimate buyers of the equipment in which our components and subsystems reside. There have been a number of initiatives that have made the next generation of products around 450 millimeters more short and we remain very, very excited about the Life Sciences businesses and the opportunities that it represents going forward.

So in summary, we’ve got significant growth opportunities in the markets we currently serve. We think we’\re very, very well positioned in those markets to increase share. We have the initiatives in place to start driving those gross margins up to the kind of target levels of 40% that we’ve talked about. We’ve got a balance sheet to execute on this vision without the $200 million of cash and no debt and we’ll be well able to tuck in the various smaller acquisitions that we see as opportunities to execute on moving forward. And we think we have a capital model to provide return to shareholders with our dividend which currently yields just over 4%.

And so with that, thank you very much.

Question-and-Answer Session

[There were no questions].

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